It may not seem like it today as market indexes skyrocket to all-time highs, but bear markets do exist. They occur approximately once every ten years and are defined as a period in which an index such as the S&P500 down 20% or more from all-time highs.
One of them happened in 2022 (it seems so long ago) and briefly in 2020. Before that, there were bear markets in 2009, 2001 and 1990.
When stock prices are soaring, it can feel like it’s time to put your foot on the gas and get more aggressive with your portfolio. But counterintuitively, this is the best time to become more conservative and mix in stocks that can weather any recession or bear market. You don’t want your entire portfolio to consist of risky hyper-growth tech stocks that could fall 80% in a market downturn. Many investors made this mistake in 2022.
Dividend stocks with high yields can be a big ballast in your portfolio as you prepare for an upcoming bear market. One of the best-yielding stocks is Altria Group (NYSE:MO). This is why it is an ideal choice for balancing a portfolio of expensive hyper-growth stocks.
Legacy tobacco and pricing power
Altria Group is the corporate owner of Philip Morris USA, which owns brands such as Marlboro and Copenhagen. Cigarettes float the company’s boat, with Marlboro leading the way. However, smoking has been declining in the United States for years.
While this is a concern for tobacco companies, Altria has been able to counter these volume declines with price increases. Turnover has increased by 13.1% over the past ten years, while operating profit has increased cumulatively by 50% over that period.
This is why Altria has been able to consistently increase its dividend per share – most recently by 4.1% to $1.02, its 59th increase in 55 years.
With a current yield of 8%, Altria Group looks like an attractive income stock if it can continue to raise prices – and thus dividend payments. The big question is whether this party can continue and whether management can switch customers to nicotine alternatives.
Can the company transition customers to other product categories?
Pricing power is high, but Altria Group cannot sustain it indefinitely. Ultimately – if the trends of recent decades continue – cigarettes will represent a minuscule part of consumer spending in the United States.
Replacing cigarettes are vaping devices and nicotine pouches. Altria Group has invested in both with its Njoy and beyond! to notice.
Both brands are growing, but are still below their direct competitors. On! Nicotine pouches have an 8.1% share of the oral tobacco market (including old chewing tobacco and new brands of nicotine pouches), while Njoy had only 5.5% of the vaping market in the United States. Combined, the two brands still represent only a small portion of Altria’s consolidated sales.
Over the next five to ten years, shareholders will need to keep an eye on the growth of these two brands. They can help offset the sales volume lost as people quit smoking.
Buy it for stable returns and low volatility
Altria Group is not a fast-growing company. In fact, I don’t expect sales to grow much over the next five years. Cigarette volumes will continue to decline, which Altria can now counter with price increases and growth! and Njoy. But at current prices, I don’t think you need much revenue growth for the stock to perform well.
The price-earnings ratio is only 8.5. The company is buying back a ton of its shares, meaning it can grow its dividend per share without increasing its nominal dividend payout.
The starting yield today is around 8% and the company has a long history of increasing dividends per share. This means that even if the stock price goes nowhere – or falls in a bear market – investors will get a consistent 8% return.
For all these reasons, I think Altria Group is a cheap stock that you would want to own during the next bear market, whenever it occurs.
Should You Invest $1,000 in Altria Group Now?
Consider the following before purchasing shares in Altria Group:
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
1 Dividend Stocks Yielding 8% to Buy in a Bear Market was originally published by The Motley Fool
